UK: Assessing Damages For A Repudiatory Breach Of Contract – The Impact Of The Gulf War

Last Updated: 29 March 2007
Article by Jeremy Glover

The repudiation of a contract by one party, if accepted by the other (often known as the injured party), will bring that contract to an end and release both parties from their primary obligations under the contract. The injured party is entitled to recover damages against the repudiator to compensate him for any financial loss which the repudiator's breach has caused him to suffer.

So far so simple. However the dispute in the case of Golden Strait Corporation v Nippon Yusen Kubishka Kaisha [2007] UKHL 12, over how to calculate those damages went all the way to the House of Lords and split their lordships 3:2.

On 17 December 2001, the owners of a ship accepted the charterer’s repudiation of a charterparty which still had nearly four years to run. A dispute arose as to the extent of owner’s entitlement to damages. The difficulty here was that clause 33 of the charter provided that if a war broke out between certain named countries then both parties would have the right to cancel the charter. The named countries included the UK, USA and Iraq.

On 20 March 2003, the Second Gulf War broke out. An arbitrator found as a fact that the charterers would in any event then have cancelled the charterparty. He also concluded that as at 17 December 2001, a reasonably well-informed person would have considered that war (or large-scale hostilities) between the United States/United Kingdom and Iraq was merely a possibility. There was no dispute that the owners were entitled to damages for having been deprived of the value of this charterparty for the fifteen months or so up to the outbreak of the War. The question before the House of Lords was whether they were entitled to compensation on the basis that the charterparty would have continued for the whole length of its nominal term (i.e. another four years) or did the outbreak of the Second Gulf War put a time limit on the recoverable damages?

It is a basic compensatory principle of the law of contract that the damages recoverable by the injured party are intended to put him in the same financial position as if the contract had been performed. However should the injured party's loss be assessed as at the date he suffers the loss, or shortly thereafter, in the light of what is then known, or at a later date when the assessment happens to be made, in the light of such later events as may then be known?

Questions of mitigation arise. For example here, as there was an available market for the chartering of vessels, the injured party's loss would be calculated on the assumption that he had, on or within a reasonable time of accepting the repudiation, taken reasonable steps to find alternative employment for his vessel for the best price reasonably obtainable. Whether the owner acted in such a way or not would be irrelevant. The reasoning behind this rule was described as one of "commercial fairness". Whilst the injured party owes no duty to the repudiator, fairness requires that he should not be allowed to rely on his own unreasonable conduct to increase the amount of his compensation.

A single issue was formulated:

"Where damages for an accepted repudiation of a contract are claimed, in what circumstances can the party in breach rely on subsequent events to show that the contractual rights which have been lost would have been rendered either less valuable or valueless?"

An early example of the basic legal position can be found in section 51(3) of the Sale of Goods Act 1893:

"Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered, or, if no time was fixed, then at the time of the refusal to deliver."

However, when the rule is applied in more complex situations, including construction contracts, the situation is not so straightforward. For example the case of Radford v De Froberville [1977] 1 WLR 1262 concerned a defendant's contractual failure to build a wall on the plaintiff's land. Oliver J said this:

"It is sometimes said that the ordinary rule is that damages for breach of contract fall to be assessed at the date of the breach. That, however, is not a universal principle and the rationale behind it appears to me to lie in the inquiry—at what date could the plaintiff reasonably have been expected to mitigate the damages by seeking an alternative to performance of the contractual obligation?"

Alternatively, in Dodd Properties (Kent) Ltd v Canterbury City Council [1981] 1 WLR 433, a case of liability for serious structural damage, Megaw LJ said this:

"The true rule is that, where there is a material difference between the cost of repair at the date of the wrongful act and the cost of repair when the repairs can, having regard to all relevant circumstances, first reasonably be undertaken, it is the latter time by reference to which the cost of repair is to be taken in assessing damages. That rule conforms with the broad and fundamental principle as to damages…"

A little later, Megaw LJ (at p 453) added:

"I agree with the observations of Oliver J in Radford v De Froberville … as to the relationship between the duty to mitigate and the measure, or amount, of damages in relation to a question such as the question with which we are here concerned."

Here, as in Dodd Properties, the majority of the House of Lords felt that account had necessarily to be taken of post-breach events. For example, if the War had started a year earlier, on 20 March 2002 it would have been impossible to ignore. The majority of the House of Lords held that the owners were only entitled to restore themselves to the same position they would have been in but for the breach, not substantially to improve upon it. Here, the owners were suggesting that the arbitrator when finally determining the damages should ignore subsequent events. As the contract contained clause 33, it would not have required any performance by the charterers after March 2003. They were seeking compensation exceeding the value of the contractual benefits of which they were deprived. It should follow that, in principle, the owners, the injured party, were not entitled to any damages in respect of the period thereafter.

The difficulty was of course that as at the date of the owners' acceptance of the charterers' repudiation of the charterparty, the owners had lost a charterparty with slightly less than four years to run. However the way the majority said this had to be looked at was that the charterparty contained clause 33. Therefore the owners had lost a charterparty which contained a provision that would enable the charterers to terminate the charterparty if a certain event happened. The event did happen and it happened before the damages had been assessed.

The owners also argued that priority should be given to the principle of certainty and finality. The contract had four years to run. The loss calculation was simple and straightforward. Another potential problem with the majority’s view was that if, on the repudiation being accepted, the charterers had promptly honoured their secondary obligation to pay damages, the transaction would have been settled well before the Second Gulf War became a reality. If the owners were, as the arbitrator held, entitled to be compensated for the value of what they had lost on the date it was lost, then what the owners lost at that date was a charterparty with slightly less than four years to run. The owners said that the idea that a party's accrued rights can be changed by subsequent events was objectionable in principle.

By describing the prospect of war in December 2001 as "merely a possibility", did the arbitrator mean that it was seen as an outside chance, thereby not affecting the marketable value of the charter at that time? Indeed the arbitrator had seen the force of this, but felt that legally he had no option but to hold that the damages should be assessed on the basis that the charter would have come to an end at the outbreak of war. He could not ignore the reality of the situation before him. Lord Mance in the Court of Appeal had summarised the position thus:

"Certainty, finality and ease of settlement are all of course important general considerations. But the element of uncertainty, resulting from the war clause, meant that the owners were never entitled to absolute confidence that the charter would run for its full seven-year period. They never had an asset which they could bank or sell on that basis. There is no reason why the transmutation of their claims to performance of the charter into claims for damages for non-performance of the charter should improve their position in this respect."

Lord Coswell in the House of Lords agreed with Lord Mance saying:

"considerations of certainty and finality have in this case to yield to the greater importance of achieving an accurate assessment of the damages based on the loss actually incurred."

Conclusion

These two quotations show how the majority of the House of Lords solved the dilemma. In reality the assessment of loss had to be made on the basis of all the information before the tribunal. Therefore, when that assessment was carried out, they could not ignore the impact of the Second Gulf War. However the owners might rightly feel a little frustrated by the result. At the date of their loss, the date the contract was broken, the contract had four years to run and no-one could have foreseen what might happen. Against that, and this may be what swayed the majority, if the compensation had been based on the full term then the owners would have received a windfall. For, had the contract not been broken and had the contract continued to run, it would have come to an end in any event in March 2003, on the outbreak of hostilities.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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